(Adds Fed speakers, comments, updates prices)
* Treasury says still considering new long bond issue
* U.S. yield curve flattest since July 26
NEW YORK, Aug 2 (Reuters) - Long-dated debt yields fell on Wednesday, and the yield curve flattened to its lowest levels in a week, after the U.S. Treasury Department said it was still considering an ultra long bond, but didn't announce a new issue. The Treasury gave no timing for when it may make a decision on an ultra-long bond. It also said it has begun to consider how it will increase debt issuance to make up for a future decline in Federal Reserve bond purchases. "They seem to be pushing off the really hard decisions that they are going to have to make to November," said Aaron Kohli, an interest rate strategist at BMO Capital Markets in New York.
Thirty-year Treasury bonds gained 2/32 in price
to yield 2.85 percent, down from 2.88 percent before the announcement. The yield curve between five-year notes and 30-year bonds flattened to 103 basis points, the lowest level since July 26. Concerns about bumping up against the debt ceiling may have delayed the Treasury from increasing debt issuance this quarter. "In that context it makes sense to not increase sizes when you think you may have to delay auctions or cut sizes to avoid running over the limit," Kohli said. The Congressional Budget Office has said U.S. lawmakers need to raise the debt ceiling by mid-October to avoid defaulting on debt payments. The Treasury said on Monday that borrowing is likely to swell to $501 billion in the fourth quarter. Meanwhile the neutral U.S. interest rate, a theoretical rate that is adjusted for inflation and would neither stimulate nor restrict an economy, fell to two-year lows in the second quarter, potentially making further interest rate hikes less likely in the near term. "The Fed just became neutral, which is not really where they wanted to be," said Lou Brien, a market strategist at DRW Trading in Chicago. "If inflation falls and growth doesnt do very well in the next few months there is no way they are going to go up again" in rates, Brien said. St. Louis Federal Reserve James Bullard is opposed to further U.S. interest rate increases because they could hinder inflation, Market News International reported on Wednesday.
Cleveland Fed President Loretta Mester said on Wednesday that the U.S. central bank should not "overreact" to weak inflation since data will arrive before a mid-September policy meeting that could clarify whether the weakness is temporary.
(Editing by Nick Zieminski and Bernadette Baum)